Private Limited Company – Definition, Advantages and Incorporation Process

A private limited company is an attractive business model for incorporation because it gives protection to the founder’s personal assets and holdings. It's a company based on a share capital, however, the company's share held by private individuals.

Definition and Meaning

A private company is based on shares. However, unlike a public company, these shares are not traded in the stock market. And so, these companies are often referred to as ‘unlisted companies’.

  • Treatment of Shares

The shares are privately held by closely knit groups. Most of the people who own the shares in a private entity tend to be those close to the founder, such as relatives, friends, angel investors, and employees.

  • Size

Private companies aren’t necessarily small businesses just because the shares cannot be traded. Although most private companies are run as small businesses, there are some large corporations that continue to run as private entities. For instance, Google India is a private limited company.

  • Raising Money 

In case a private company wants to increase its funding, the next step is to raise resources from venture capitalists or through a private placement. Venture capitalists specialize in high-risk and high-return businesses, while private placement can be done by institutional investors.

  • Going Public 

A private company can also choose to become a public company by issuing shares to the public. This is called IPO or Initial Public Offering. Once a company goes public, the stocks are traded in the stock market.

For example ICICI Prudential Life Insurance changed its private structure and went public in 2016. The insurance company raised a whopping INR 6057 crores. It became the second largest IPO in the country and was the first IPO by an Indian company.

 

Private Company Examples:

Here are a few examples of some well-known brands that operate as private entities:

  • One97 Enterprise Mobile Solutions Private Limited: PayTM
  • Innovate Retail Concepts Private Limited: Bigbasket
  • Oberoi Hotels Private Limited
  • Adobe Systems India Private Limited
  • Life Style International Private Limited

Requirements of a Private Company Under the Companies Act, 2013

Under Section 2 (68) of the Companies Act, 2013, a Private Limited Company refers to any company that has:

  • A minimum paid-up capital of at least one lakh
  • Restricted share transfer
  • Limitation on the number of members – Minimum of 2 and maximum of 200
  • Prohibition of share subscription by the public

Pvt ltd Compliances

Advantages and Disadvantages of Private Companies

 

 

BASIS

ADVANTAGES

DISADVANTAGES

Additional Funding

Funding can come from various sources such as - Angel investors, seeding funding and venture capitalists.

Funding cannot be raised from the public since the public subscription is prohibited.

Existence and Maintenance

A private company has perpetual succession and does not depend on its owners or shareholders for its survival.

A company would have to abide by statutory compliance mandates audits, tax filings, etc.

Costs and Profits

The profits of the company can be distributed to the shareholders via dividends

The company registration is high. Also, the company will still have to deal with higher income tax slabs and costs of compliance & statutory maintenance.

Allotment of Shares

The founder can choose who holds the shares in the company. ESOPs can also be issued to deserving employees as a reward mechanism.

Private companies have a restriction on share transfer. The existing shareholders would have a say if another shareholder wishes to sell his/her shares

Liability

The owners’ liability is limited to the value of the shares held by them. This leaves their personal finances protected.

The company would have to meet all its financial obligations with its revenues, and can only take loans to manage any such financial deficits.

Advantages of Pvt Ltd

Why do Larger Companies Choose to Remain Private?

Despite the lack of access to public funds, large companies choose to remain private because:

  • Privacy: A public company would have to disclose the stocks and holdings of their key management and board of directors, along with their salaries. Also, public companies have stricter compliance norms with regard to furnishing financial reports, etc, which would be accessed by the public.

 

  • Stock prices: The value of the company’s stocks depends on several market factors. This could lead to severe fluctuations despite the fact that the company is financially sound. For instance, a crash in the economy would reflect on the prices of the shares and this could put the prospects of the company in jeopardy.

 

  • Loss of Control: A public company essentially means several shareholders. The founder of the holding company of the private entity might not want to dilute the control.

 

Example: The founder of a public company cannot take any decision on his own and must call a board meeting and general meetings. However, in a private setup, the founder can easily sway the few shareholders in his favor, even more so if he has maximum holdings.

5 Steps to Incorporate a Private Limited Company

To encourage quicker registration timelines, the Ministry of Corporate Affairs (MCA) has enabled a fast-track registration process. The registration process can be done online, and supporting documents are submitted in the electronic formats

pvt ltd registration procedure

STEP 1: Obtaining DSC (Digital Signature Certificate) 

The members of the company who will be involved in the incorporation of the company would need to have a DSC. The DSC of the first shareholders would be needed to sign the e-MOA and e-AOA of the company to upload the same with the Registrar of Companies (Roc). This makes DSCs for the first subscribers or promoters mandatory. Additionally, the proposed director would have to obtain a DIN, for which the DSC is compulsory.

Documents for DSC:

  • Passport photograph
  • Address proof (Self-attested)
  • Copy of PAN card (Self-attested)

 

STEP 2: Obtaining DIN (Director Identification Number)

The DIN numbers of the proposed directors are required to be intimated to the Ministry in the incorporation forms. Therefore, DIN is mandatory for the proposed directors of the company. 

Documents for DIN registration:

  • Passport photograph
  • Address proof (Self-attested)
  • Copy of PAN card (Self-attested)
  • DSC of the director

STEP 3: Company Name via RUN Webservice

Before incorporating a company, the name of the company is to be reserved. To reserve the name of a new company or change the name of an existing company, a simple online service called RUN (Reserve Unique Name) is used. 

Here are a few guidelines by the MCA while picking a company name: 

  • Unique and original. You can check availability using the company name search
  • Easy to remember, pronounce and spell
  • Simple and short
  • Distinctive
  • Not be identical to other companies or businesses
  • Not infringe on existing trademarks. You can conduct a trademarks search to be sure

The application for the company name is processed by the Central Registration Centre(CRC) under Non- Straight-through Processing mode. The CRC will conduct a comprehensive check and give its approval or rejection of the name. Each name submission is to be accompanied by fees of INR 1000. 

Once the name is approved, it is valid for: 

  • 20 days: For a new company
  • 60 days: For an existing company

STEP 4: Draft of MOA, AOA

The Memorandum of Association and Article of Association are essential documents for the incorporation of any company. Both of these documents define the internal and external relations of the company with its stakeholders.

  • MOA: defines the objectives, capital, registered office, etc.
  • AOA: defines the rules and regulation for running and managing the company.

Both these documents are drafted by professionals and must be submitted along with subscribers’ sheet, which contains the DSCs of all the founding members.

STEP 5: Application for incorporation

Once the necessary documents have been prepared, the following form will have to be filed to incorporate the company.

  1. SPICe-32: Application for company incorporation

The following supporting documents would also have to be attached to these forms

  1. e-MOA and e-AOA along with the signed subscribers' sheet
  2. INC - 9 Affidavit and declaration by the first subscribers and directors of the company 
  3. Proof of office address: Lease deed / Conveyance / Rent agreement along with rent receipts
  4. Utility bills of the registered office (not older than two months)
  5. Form DIR – 2 (Consent of directors)

Note that, Form INC-22: Details of registered office address (might be required later if proof of address is not filed with the SPICe form)

Once all the procedures for company registration are complete, the Certificate of Incorporation will be issued to the company.

Tax Implications of a Private Company

Although the tax slabs of a private company are high, there are considerably more attractive than a sole proprietor model, where the taxation would be based on individual tax slabs. Future, companies under Startup India and those that are MSMEs get attractive benefits.

Under the Finance Bill of 2018, the taxation of private companies for the Assessment Year 2019-20 is as follows:

If the gross receipts in the previous year (2016-17) doesn’t exceed INR 250 Crores

25% of Net Profit

All other cases

30% of Net Profit

Surcharge: If income exceeds INR 1 Crore

7%

Surcharge: If income exceeds INR 10 Crore

12%

Health and Education Cess

4% on the aggregate of income tax and surcharge

Dividend distribution tax

15% (Plus Surcharge and Cess)

 

Tax Benefits under Startup India

In 2017, a new section was introduced in the Income Tax Act. Section 80 IAC provides a 100% deductions of the profits of ‘eligible start-ups’ for three consecutive years out of seven years.

Eligible Startups

‘Eligible business’ of start-ups includes innovation, development or new processes and products, or any new services based on new technology and intellectual property. This includes scalable business models that have a high potential to generate wealth and employment opportunities.

Conclusion

A privately limited business structure is ideal for those businesses to looking to gain external funding for business development without the dilution of the founder’s interest in the company.


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